Information flows among rivals and corporate investment

Abstract

Using a novel pairwise measure of firms' acquisition of rivals' disclosures, we show that investment opportunities drive interfirm information flows. We find that these flows predict subsequent mergers and acquisitions as well as how and how much firms invest, relative to rivals. Moreover, firms' use of rivals' information often hinges on the similarities of their products. Our results suggest that rivals' public information, far from being unusable, helps facilitate investment and product decisions, including acquisitions and product differentiation strategies. The findings also support a learning mechanism that could partly underlie the emerging literature on peer investment effects.

Public Firm Presence, Financial Reporting, and the Decline of U.S. Manufacturing

“…Prior literature also finds that private firms are more sensitive to their investment opportunities when they operate in industries with greater public firm presence, which is directly consistent with competitors benefiting from public firm information (e.g., Badertscher, Shroff, and White [2013], Shroff, Verdi, and Yost [2017]). Further, previous research also finds that investment opportunities cause firms to acquire accounting information about their rivals (Bernard, Blackburne, and Thornock [2020]). In total, the literature provides indirect and direct evidence of domestic firms benefiting from the information produced as a result of public firm presence.…”

“…Beyond these mandated disclosures, the managers of public firms also often release forecasts of future earnings and financial decisions and discuss firm performance with analysts, who in turn produce their own forecasts. Although investors are the intended beneficiaries of much of this information, competitors can also use it (Badertscher, Shroff, and White [2013], Kim [2019], Bernard, Blackburne, and Thornock [2020]). For example, foreign importers can draw on information about production schedules, investments, profitability, accruals, sales, and risk factors to understand U.S. market demand and consumer preferences, as well as the U.S. competitive landscape.…”

“…For example,Bernard [2016],Berger et al [2019],Christensen et al [2020],Hann et al [2020], andBreuer [2021].6 For example,Badertscher et al [2013],Shroff et al [2017],Bernard et al [2020],Kim and Olbert [2021], andSani [2021].7 Moreover, whether increased investment efficiency results in more production is also ex ante unclear. Although firms will generally increase an activity when that activity becomes more efficient, investment efficiency could reduce investment if, for example, doing so mainly curbs overinvestment.8 A concurrent working paper,Yang [2019], finds evidence that U.S. segment disclosures increase import competition in the United States.…”

How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

“…of the private firms' publicly traded peers (Badertscher et al (2013); Bernard, Blackburne, and Thornock (2020); Barrios et al (2021); Kim and Valentine (2021)). In this case, private firms' disclosures will generate positive information externalities, which will facilitate the ability of global investors to learn and accurately value public firms, thereby increasing the demand for public equity.…”

“…The impact of private firm disclosures on the demand for public firm equity is theoretically ambiguous. It depends critically on assumptions about whether private firm disclosures are primarily idiosyncraticproviding information specifically about private firms themselves (e.g., Bushman, Piotroski, and Smith (2004); Davila and Korinek (2016))or industry widegenerating information relevant for evaluating public peers in the same industry (e.g., Badertscher, Shroff, and White (2013); Kim, Verdi, and Yost (2020); Bernard, Blackburne, and Thornock (2020); 1 We use the terms spillovers and externalities interchangeably. As discussed further below, in our context, we examine two types of disclosure spillovers or externalitiesthe first being negative pecuniary externalities, which describes the possibility that private firm disclosures can induce redistribution of capital away from public firms (e.g., Davila and Korinek (2016)), whereas the second being positive information externalities, which means that private firm disclosures can help reduce informational uncertainty about public peer firms and help them attract more capital.…”